Funding Circle Sets Its Sights On U.S. Small Business Lending Market

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Funding Circle's Bernardo Martinez

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Funding Circle, the UK-based small business lender that went public on the London Stock Exchange in September, is setting its sights on the small business U.S. market, hoping to become the leading lender to what it sees as an underserved market.

While fintechs and traditional banks are stepping up lending to small business owners, Funding Circle is betting its longer-term loans and competitive rates with banks will bring more business its way. Small business lending in the U.S. is “fractured across multiple competitors,” said Bernardo Martinez, U.S. managing director at Funding Circle. “Typically banks haven’t focused on the segment. It’s an unmet need from small businesses standpoints.”

Small Business Confidence Surging

Funding Circle’s push into the small business lending market in the U.S. comes at a time when traditional banks, fintechs, and credit unions are circling. The economy is booming, unemployment is low and small businesses are making money. At the same time, big banks, regional ones and credit unions are looking to diversify their businesses into new markets. Earlier this week Biz2Credit released its small business lending index for October, which showed the approval rates for small business loans among big banks set a record in October, increasing to 26.8% from 26.7% compared to September.

It also comes as optimism is high among small businesses with the National Federation of Independent Business’ Small Business Optimism Index hitting a reading of 107.9 in September, marking the third highest reading since the NFIB began conducting it 45 years ago. “This is the longest streak of small business optimism in history, evidence that tax cuts and regulatory rollbacks are paying off for the economy as a whole,” said NFIB President and CEO Juanita D. Duggan in a press release when announcing the results. “Our members say that business is booming and prospects continue to look bright.”

When it comes to taking on the rivals, Funding Circle views the market in three segments. There are the traditional banks that are offering small business owners term loan products that range from six months to five years, providing competitive interest rates but a process that can take months and require reams of paperwork. Then there are the fintechs, which can get money in small business owners hands quickly but don’t offer terms that are longer than two or three years. Finally, there are PayPal, Amazon, and Square which are lending to their existing customers who need access to working capital.

Funding Circle Aims To Stand Out With Longer Loan Terms

Funding Circle hopes to differentiate by offering small businesses loans that have terms that are as long as five years but also have interest rates that are competitive with traditional banks. “A lot of the learnings in the UK market have enabled us to develop technology and processes to get a better assessment of customers,” said Martinez. “We also have investors that enable us to have access to capital at an affordable rate. As a marketplace lender, we have been able to connect those good investors looking for good returns with a more affordable price for borrowers.” The interest rate on a five-year loan at Funding Circle ranges from 8.5% to 27.79% while the rate on a two-year loan ranges from 7.6% to 25.54%.

Funding Circle is optimistic about its prospects in the U.S. market but that doesn’t mean it isn’t paying close attention to what is going on in the economy both here and abroad. The stock market is in a near decade bull run, the economy has been surging for years now and interest rates still remain low. But there are signs that we are entering the late stage of the economic cycle and if things worsen due to trade wars or other unforeseen reasons, there are some concerns small business owners will have a hard time paying back their loans. That’s not to say any of that is happening yet, but some lenders to consumers have been reigning in the amount they are willing to lend. Take credit card issuers Capital One Financial and Discover Financial Services, two of the nation’s biggest credit card companies. According to a recent Wall Street Journal report the two are tightening lending standards, becoming more cautious in how they deal with credit limits. There isn’t any evidence that customers are having a hard time paying back their balances but the companies realize the party can’t last forever. “In so many ways, one can’t help but be struck by … just how good the economy [at] this point is,” Capital One Chief Executive Richard Fairbank said on the company’s earnings call, which was covered by The Wall Street Journal. “And in some ways, it almost feels too good to be true.”

Martinez said the executives at Funding Circle pay close attention to the macroeconomic environment and have robust lending and risk management tools in place to assure investors the lending being provided to small business owners can support a recession. “We are always mindful at some point we need to adjust if we don’t think the market can sustain the lending activity,” said the executive. Having said that, Martinez is confident the market will remain strong with opportunities to grow. “We see a lot of demand in the U.S. They are looking for opportunities to invest in their businesses and we are here to help.”